Subprime dampens festive holiday spirit

Commentary: Hong Kong, China creating their own toxic property debt?

HONG KONG (MarketWatch) -- It may be the season of office holiday parties and long lunches, but investors in Hong Kong and China have been warned to be alert for a sobering subprime chill. And festive spirits in the mainland markets could be in short supply with renewed speculation Beijing might be about to unveil another rate hike, never mind most people must work through the holidays.

So far, Hong Kong and most of Asia have largely skirted the growing subprime crises. Not only is the property misery in the U.S. not our problem; it has even prompted some global funds to retarget funds to safer havens in Asia.

But last week Joseph Yam, the Hong Kong Monetary Authority chief known for his distinctive silver mop of hair as well as being the world's highest paid central banker, raised a red flag that local banks will not escape unscathed.

His comments sent small banks, deemed the most vulnerable into a sell off on Friday with the likes of Fubon Bank Hong Kong (636) falling 8% and Dah Sing (2356) down 7%. Bank of China Hong Kong (3988) is estimated to have HK$10 billon ($1.28 billion) exposure to subprime-related investments but is better protected by its larger size. Next to the blowouts seen by UBS
UBS, -3.01%
or Citibank
C, -0.18%
in recent days, this looks like little more than a rounding error.

While that may be reassuring, as we try to guess where the next fault line of subprime contagion could surface, it is surely not too much of a leap for Asian central bankers watching U.S. housing crumble (and likely also the U.K., too) to ask, "Could it happen here?"

That is, creating their own toxic housing debt.

Hong Kong and Japan of course have been there before. But what we have seen of late is when the prop of freely available bank mortgages goes, the fundamentals supporting property can also quickly reverse.

In China, policy makers have been on counter property bubble alert for some months now. But now measures to rein the market have an increasingly desperate appearance. Last week foreign buyers were locked out of bidding for two prime sites on Shanghai's bund. Then a luxury residential development in Shanghai's Pudong district was ordered to cut prices or turn all units into leases after it was accused of artificially creating a shortage of supply to boost prices.

Another new anti-speculation weapon being considered is a levy on developers stockpiling idle residential plots.

The contrast with the Hong Kong of 2007 is stark. Here policymakers appear blithely indifferent to a renewed property surge as residential transactions last month hit a 10-year peak the highest since the infamous crash a decade ago that left residential prices at 35% of their top values in some instances.

The only public debate of note was a letter to the South China Morning Post calling for a property gains tax to curb speculation tantamount to heresy in this town.

Developers dripping units of flats into the market to stoke prices is a common yet controversial practice. Indeed, squeezing supply to support prices is arguably now official government policy.

Despite record transactions and luxury property above 1997 prices, Hong Kong is also facing multi-year lows of new flat supply. Property analysts at UBS caution there is a risk of a repeat boom-and-bust cycle by pushing prices to unsustainable levels.

Flat supply is down to 12,000 units per year for the next three years, going by current land sales, against an average of 25,000.

Arguably, the root of this is the land sales system which requires that the developer must bid 80% of the reserve price to trigger a land auction. In November the Lands Department turned down a record nine bids in one month seeking to trigger auctions at one site.

As the government body is charged merely with maximizing land sales revenues, this system looks preprogrammed to produce asset bubbles. Developers cushioned with strong profits and chunky margins are well-positioned for this high risk game of cat and mouse with the government. The weak link in the property chain could again be marginal borrowers. For now at least, there is little sign of banks easing back on mortgage lending.

The capacity of mainland banks to handle mortgage risk, liquidity shocks and property cycles is another matter altogether. Consumer lending is a new game for them. The upshot is that safe havens from subprime woes could well be harder to find next year.

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